Buying a car is a major financial decision, and for most Canadians, including those in British Columbia, it involves securing a car loan. However, with so much information available, it’s easy to fall for common misconceptions about how car financing works. These myths can lead to unnecessary stress, missed opportunities, or even costly mistakes when purchasing a vehicle.
By debunking these common car loan myths, you’ll be better prepared to make informed financial decisions, secure the best possible loan terms, and avoid unnecessary pitfalls. Whether you’re self-employed, have less-than-perfect credit, or are considering a used vs. new car, understanding the truth about car financing can help you save money and protect your financial future.
Let’s take a closer look at some of the most common car loan myths and the reality behind them.
Pre-approval Hurts Your Credit Score
Many British Columbians worry that getting pre-approved for a car loan will negatively affect their credit score, but this is not true. When you apply for pre-approval, lenders in Canada perform a soft credit inquiry, which does not impact your credit score. This check allows lenders to estimate what loan terms they might offer based on your credit history.
You Must Finance Through a Dealership or a Bank
Many British Columbians believe that car loans must be obtained through big name dealerships or a major bank, but that’s not the case. Canadians have several other options, including specialized financing providers such BC First Nations Financing. These lenders often provide more competitive interest rates and flexible terms, especially for those with non-traditional income sources or lower credit scores.
A Large Down Payment Is Required
While a large down payment can help lower the amount you need to borrow, it is not always a requirement in Canada. Many lenders in British Columbia offer car loans with low or even zero down payment options. However, it’s important to note that a lower down payment means a higher total loan amount, which can lead to increased interest costs over time. If possible, putting down even a small amount, such as 10-20%, can help reduce your monthly payments and save you money in the long run.
You Should Always Buy a New Car Instead of a Used One
Many Canadians believe that buying a new car is always the best option, but this isn’t necessarily true especially when considering depreciation. In British Columbia, a brand-new vehicle loses a significant portion of its value the moment it is driven off the lot, typically 20-30% in the first year alone. A well-maintained used car, on the other hand, can provide better value by avoiding the steepest depreciation while still offering reliability.
You Can’t Get a Car Loan If You’re Self-Employed
Self-employed Canadians often believe they won’t qualify for a car loan because they don’t have a traditional paycheque. While it may require extra documentation, self-employed individuals can qualify for car loans in BC. Instead of pay stubs, lenders may request proof of income through tax returns, bank statements, or business financial statements. Some lenders also specialize in self-employed or non-traditional auto loans, considering factors such as business revenue and overall financial health rather than just a steady salary.
You Must Have Perfect Credit to Get a Car Loan
Many people in Canada, including British Columbia, believe that a high credit score is the only way to qualify for a car loan. While it’s true that a good credit score helps secure lower interest rates and better loan terms, having fair or even poor credit does not automatically disqualify you from getting approved. Many lenders, including alternative financing companies like BC First Nations Financing, offer loans to individuals with a credit score below 650 or even lower by using alternative qualification metrics.
A Longer Loan Term Is Always Better
Many car buyers in Canada focus on securing the lowest possible monthly payment, leading them to opt for longer loan terms, often 72 to 96 months (6 to 8 years). While this may reduce your monthly financial burden, it’s not always the best decision in the long run.
The main drawback of longer loan terms is the higher total interest paid over time. Even though the payments seem manageable, the extended loan period allows interest to accumulate, making the car significantly more expensive. For example, a $30,000 car loan at a 6% interest rate over 8 years will result in paying thousands more in interest than if financed over 5 years. If you need to get rid of the car before the loan is paid off, you could still owe money even after selling it.
A shorter loan term (48-60 months) may come with higher monthly payments but can save you money overall by reducing interest costs and helping you build equity in the vehicle faster. If a longer loan term is necessary to keep payments affordable, consider making extra payments whenever possible to pay off the loan faster and reduce interest costs.
If you are ready to start the car loan process, then fill out this form to get pre-approved today! We can’t wait to help you get back on the road.
